The Single Euro Payments Area (SEPA) is an EU-led initiative to harmonize the way cashless euro payments are made across Europe. All European Union countries and several non-EU countries are part of SEPA.
The basic principle of SEPA, namely that payments in euros between two Member States should be as simple and seamless as national payments, is one of the central pillars of the single market.
Despite the political will behind the project, there have been some hiccups along the way.
After some participants missed the initial SEPA compliance deadline, the European Commission had to grant a six-month extension to those who dragged their feet. Yet by the end of 2014, eurozone countries had rolled out the program in full, and by 2016 it had been implemented in all SEPA member states.
Today, consumers and businesses within the SEPA zone can easily make euro transfers between accounts using only the international bank account number (IBAN) of the receiving account.
Related: EU FinTechs and Central Bank of Ireland tackle IBAN discrimination
The pan-European standard for debits and transfers came at a time when national payments were already kicking into high gear: instant clearing. Ultimately for SEPA, although the original goal of making cross-border euro payments as easy as domestic payments has become a reality, in many cases they are now much slower.
The problem, however, is not that SEPA does not have its own real-time payment rail. It does.
Launched in November 2017, SEPA instant transfers build on the SEPA architecture to enable payment clearing in 10 seconds or less. To do this, once a payment service provider recognizes a SEPA transaction as an instant payment, it immediately processes and clears the full amount instead of doing it in batches like a regular transfer.
See also: Real-time demand will boost open banking payments in the EU, says Worldpay EMEA GM
Despite the obvious potential contained in SEPA Instant, it has yet to deliver on its promise of ultra-fast euro transfers across the region.
According to European Payments Councill, after a strong increase in 2019, the adoption of SEPA Instant seems to have slowed considerably. In the first quarter of 2022, instant transactions accounted for less than 12% of all SEPA credit payments.
Read also: Lackluster rollout of successful European SEPA Instant Stymies payment system, says product manager Wise
Challenges for the Single Euro Payments Area
In light of the widespread use and application of national real-time payment systems, why the slow deployment of SEPA Instant?
To begin with, unlike the requirements enshrined in the legislation on which SEPA was originally based, there is no legally binding obligation for banks to offer real-time services. Even if a payer initiates an instant transfer, if the account receiving the funds is with a bank that is not enrolled in the program, the payment defaults to a standard SEPA credit transaction.
Read more: ECB’s Panetta urges businesses to adopt EU instant payment solutions
Moreover, despite being used by millions of Europeans every day, the success of real-time solutions at national level may actually hamper efforts to implement instant euro payments across borders.
Between the different national clearing houses and the existing instant payment networks, interoperability becomes a challenge. Of course, these systems do not necessarily compete with Instant SEPA, but they distract from the need for a SEPA-wide solution and risk fragmenting the European instant payments ecosystem.
In fact, the Data suggests that fragmentation has already taken place. In June 2022, the ratio of SEPA instant credit transactions to traditional SEPA credit transactions ranged from 100% instant in Slovenia to only 1% instant in Norway and Switzerland.
Of course, banks operating in countries outside the eurozone have less incentive to offer real-time euro payments, but even in countries using the euro, usage is as low as 5% in Ireland and 10% in Luxemburg.
Related: Europe is ripe for instant payments where 73% of all transactions are still made in cash
A final obstacle preventing instant cross-border payments in the region is the way many payment service providers charge additional transaction fees for the service. While SEPA legislation requires PSPs to charge the same fees for domestic and international transactions within the single payment space, this requirement has not been extended to SEPA instant transfers.
What’s next for cross-border euro payments?
Fortunately, it’s not all bad news for SEPA. While further fragmentation risks undermining the central vision of the pan-European payments integration project, officials in Brussels have indicated that a more practical regulatory approach may soon be on the horizon.
When PYMNTS spoke with Gijs Boudewijn, CEO of the Dutch Payments Association, he said he expected the regulations to be passed in the third quarter of this year:
“The expectation is that [the European Payments Council] will mandate instant payments to provide [an] infrastructure to build possible European solutions as an alternative to non-European solutions,” Boudewijn said, also hinting at a much-awaited card payment system for SEPA.
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